Euro woes to spread via credit
James Saft is a Reuters columnist. The opinions expressed are his own.
A sharp cut back in lending by euro zone banks in their scramble to raise capital will prove an important channel spreading pain from the vulnerable single currency area to the rest of the world.
Though the euro-induced credit crunch will be less important than the outright effects of the euro zone recession, in some areas, like trade finance, and in some regions, such as emerging Europe, the impact will be felt far more quickly.
“They are being asked to increase their capital base. You can go and raise capital or you go and get a government handout or you shed assets. Raising assets will be very, very tough.”
Euro zone banks will be cutting back on foreign exposure, either out of prudence or under pressure from their regulators.
Austria this week imposed restrictions on its leading banks, including Raiffeisen, Erste Group Bank and Bank Austria in central and eastern Europe, requiring them to make new loans of no more than to 1.1 times the deposits and wholesale funding raised locally.
Romania could see a deleveraging equal to 1.6 percent of GDP, while the Czech Republic, Hungary and Turkey all face hits of about a half a percent of annual output, according to data from Nomura International.
Less lending by international banks will drive the overall cost of credit up, almost certainly working against official policy which will be trying to reduce rates.
In some areas, like trade finance where some European lenders are prominent, this impact may be felt rapidly, as it was in 2008 when fear of counterparty risk prompted many banks to pull out of trade financing for a time. That had a magnifying impact on the global downturn, as some exports were delayed despite their being willing buyers and sellers at a given price, simply because the letters of credit needed to facilitate the deals fell through.
This will only be intensified by European bank recapitalization proposals, which impose a tight deadline of next June for 70 euro zone banks to find about 100 billion in new capital. And remember, that amount of capital, huge as it is, may prove insufficient given the recent free fall in the value of euro zone sovereign debt, to which euro zone banks have critically high exposure.
BANKS FOR SALE
Given the difficulty in raising capital directly from investors, euro zone banks are looking to sell whatever they can that will fetch a reasonable price.
Since investors, and their peers, don’t want to buy more European exposure, that means selling off bits and pieces of financial institutions outside the euro zone.
Spanish bank Santander, seeking to boost its core capital to 10 percent by June, said this week it will sell a 7.8 percent stake in Santander Chile, worth around $1 billion dollars.
That deal sent shares of the Chilean affiliate down sharply, increasing the dampening impact on bank valuations there, and ultimately on credit availability.
While the impact in Asia, where continental European banks hold just 5.0 percent of their assets, will be less, it will still be felt, especially in areas already being hit hard, like Hong Kong property development, according to analysts at Barclays Capital.
And the great banking recapitalization of 2012 likely won’t be limited to Europe, as shown by the Federal Reserve’s newly announced stress test of US banks.
Austria‘s move to restrict lending abroad has to be viewed as a kind of economic protectionism, a sort of reverse tariff, but this time on precious bank capital. That sets an extremely risky precedent, but one it is easy to see other euro zone nations following.
If Germany fears the costs of recapitalizing its banks in the event of a euro zone break up, as well it should, a logical step would be for it to try and conserve its national banking resources via similar moves.
That same logic holds, even more chillingly, for countries outside the euro zone. Tight credit, and tight controls on credit, may end up being a leading story of 2012.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)